Rebuffing aggressive overtures from Microsoft, Time Warner has agreed to sell a 5 percent stake in America Online to Google for $1 billion in cash as part of an expanded partnership between AOL, once the dominant company on the Internet, and Google, the current online king.
At stake in this battle is leadership in Internet advertising, a growing threat to other media companies. The loss is a blow to Microsoft Corp., which had sought AOL as a partner in its advertising venture to undercut Google Inc., its potent rival.
Though Google is just seven years old, its lucrative search advertising business and technical prowess could enable it to offer consumers free software and services that would directly attack Microsoft's core software business.
While the terms of the proposed five-year deal are largely set, it will not be final until it is ratified Tuesday by Time Warner Inc.'s board of directors, an executive who was briefed on the negotiations said.
Google has agreed to give AOL ads special placement on its site. Until now, Google prided itself on its auction system for ads, which treated small businesses on equal footing with its largest customers.
By agreeing to change its business practices for this deal, Google fends off what could have been a significant challenge from a combination of AOL and Microsoft and cements its position as far and away the largest seller of search advertising.
"This is Google's first test as a chess player in a major corporate battle," said John Battelle, author of The Search: How Google and Its Rivals rewrote the Rules of Business and Transformed Our Culture.
"They are saying, `We will take some of our pawns and block the move to our queen by Microsoft,'" he said. "Until now, Google has said, `We don't think about our competitors. We spend all our time building better products for our users.'"
Negotiations among the companies reached a fevered pitch Thursday night, executives briefed on the talks said, when teams from Google and Microsoft were in separate conference rooms in the Time Warner Center in New York and executives from the media company shuttled between them. At the same time, Time Warner was holding its corporate Christmas party at the Mandarin Oriental Hotel, also in the Time Warner Center.
At 9 that evening, Richard D. Parsons, chairman and chief executive of Time Warner, left the party to tell Eric E. Schmidt, Google's chairman and CEO who was leading its negotiation in another part of the complex, that he would accept Google's sweetened offer.
